Will Ballast Point Survive?

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Now that we’ve had 48 hours to digest the news that Kings and Convicts, a tiny, two-year-old brewery, has indeed purchased Ballast Point, new questions have emerged. Initially everyone was trying to learn who Kings and Convicts (K&C) were. Was the deal legit? And, because Ballast Point was purchased for a billion dollars just four years ago, the question everyone wanted answered—what was the (fire?) sale price? Thanks to some great reporting by Josh Noel and Kate Bernot, some of these questions have come into focus. On Tuesday night I was able to speak with Brendan Watters, one of the two co-owners of K&C, and later began chatting with folks outside the deal. Now that we know something about this madness, perhaps it’s time to ask a different question: is this a new beginning for the newly-independent San Diego brewery, or the beginning of the end?

Who Are Kings and Convicts?

Noel described K&C as a “suburban Chicago” brewery, but that doesn’t quite describe how far out Highwood, Illinois is—it’s actually closer to the Wisconsin state line than Soldier Field. Indeed, before the Ballast Point deal happened, K&C had already begun a new, much bigger brewery project in Wisconsin. I wanted to get a sense of how Watters would describe the brewery, so I asked him about the “golf simulators” mentioned on the Google search results yesterday when the website was down. It gives some sense of how suburban K&C must be:

“We’ve got a tiny little taproom you can fit about twenty people in and then you've got the brewery out the back. You get your beer, you come out there, you book an hour and you play Augusta or Pebble Beach and you play on the simulator. It's a real simulator like Jordan Spieth or Tiger has in the basement. It's Chicago; you have a golf season of six months. I like golf and a lot of people who come into the brewery like golf, so when it starts snowing you come in and bring your clubs and grab a beer and swing away.”

Well, that’s unusual. But they seem to take their beer seriously. Watters is a charming, chatty guy—the kind of guy you’d love to find sitting next to you at a bar. (He’s the Aussie, or “convict” of the brewery’s name. The “king” is Englishman Chris Bradley.) When I asked what beers the brewery’s known for, he joked, “It's not like, ‘Oh my god, you've hit 600 barrels; you're known for this awesome beer!’” They don’t do hazies, he said, but about half the two dozen or so beers they’ve made have been IPAs. But their real love is lagers. “Pils is one of our biggest selling [beers], and that's one of our issues, because we lager properly for six weeks.”

The brand tries to draw in Australia, Britain, and Chicago’s underworld history in puckish celebration of charlatans and rogues. It’s got a kitchen-sink quality that may or may not gel—but in any case, it’s very far from the sun-washed Southern California cool of Ballast Point.

Buying Ballast Point

By this time, you know that K&C are not about to divulge the price they paid for Ballast Point. I actually saved that question for last. As I headed into the wind-up, Watters saw it coming from a mile away. “The question I have to ask,” I started, but he interrupted me. “How much?” He trotted through the now widely-reported details of the arrangement, which involves a group of investors. “I brought in private individuals and a private group that have either invested with me before in my other ventures, or people that have known me for a long time.” Another factor K&C hasn’t disclosed is how much of debt the brewery took on.

Perhaps the price is less important than the plan. Now that this group of very green brewery owners has swallowed Ballast Point whole, what do they plan to do with it? On this point, Watters offered very broad, pretty obvious strokes to start. They plan to “bring back the craft nature and some of the innovation and R&D” by letting local brewers follow their bliss. “We are definitely going to come up with new beers, new beer names, maybe funk up the label a bit and have some fun with it.”

He then turned to what sounds like the more central goal: paring back. “There’s 49 states and there’s 12 that really make up 90% of the sales,” he began. The beer is nominally national, but sales reveal its real locus to be the West Coast.

“One in five beers we brew are sold in San Diego; over half are sold in California. When more than half the beer is sold in California—let's just start the focus on California for game one. Game two is the West Coast. Then we start to look at the major markets of Chicago, New York, Boston, Philly, Wisconsin, Colorado, Texas, and Nevada.

“There are no Ballast Point-specific sales people. There’s no one on the ground looking after this. This company still does more today that it did when it was bought. I know everyone thinks it's terrible, but when I step back, tell me what other brands that are out there that you consider terrible at 200k barrels? The liquid’s good, it needs a change in perception, and we’re going to execute that plan to market it.”

Why Constellation Sold Ballast Point

These approaches seem fairly straightforward. But Ballast Point is a damaged brand. Constellation had to slash prices and this year started shuttering existing pubs and scuppering plans for new ones. After using its national might to drive sales up to 430,000 barrels, the brand has been in freefall and will only make 200,000 this year. I wondered what it looked like from Constellation’s side and contacted an industry insider for some insight on what may be happening. He gave me some great background and explained why Constellation was desperate to dump what was still one of the largest brands in the country.

Craft beer isn’t really what the company does. “Constellation has a big wine business and a big Mexican beer business. The idea that they could have a craft beer business was misguided,” he told me. They assumed it would be easy to scale up Ballast Point and plug it into their distributor network the way they do Corona or Modelo. But craft beer requires a different way of thinking, and it wasn’t in their wheelhouse.

“Businesses ultimately have bandwidth. They have to make decisions and choices. If you take that bandwidth up with things that are declining, you’re sacrificing your ability to pursue things that could grow your business.”

In economics, there’s the concept of the “opportunity cost.” If a company decides to do X, it can’t do Y or Z. In putting resources into Ballast Point, Constellation was missing other opportunities—seltzer, for example, a trend the company completely failed to anticipate. Flavored malt beverages are a far better fit than craft beer for Constellation, and in dumping Ballast Point—even at a massive loss—it frees the company up to focus on its core competencies.

Can Kings and Convicts Turn Ballast Around?

Kings and Convicts apparently found the capital to buy a large craft brewery, but do they have the skills and experience to do it? My industry source was very skeptical. “They don’t have the playbook,” he said. When a larger brewery buys a smaller one, it understands the industry. People know what to do and in which order to do it. Kings and Convicts probably doesn’t, he believes.

If a larger brewery bought Ballast, he described what would happen next. “We know how we reassure the staff; we know how to talk to the distributors. The new guys have none of that. Boston Beer could. ABI could. They could meet 300 distributors in a week. These guys can’t. That’s why the chances that they’ll hold onto current volume is miniscule.”

He added that one of the very serious challenges now will be keeping talent at Ballast Point, as key employees, nervous at the prospects the brewery will flourish, look around for new jobs. This, ultimately, could be the element that makes or breaks the new Ballast Point. The recipes, the brand, the equipment—they weren’t getting it done for Constellation. If anything, these elements are liabilities—I saw someone jokingly call the brand a “toxic asset.” Ballast’s success will hinge on how well those people retool the brand and its relationships and Bring new vitality to the operations and products.

The first order will be to soothe anxious distributors. Growth was out of the question, my source felt, because Constellation had so much more leverage with distributors than the new guys will have. With high-volume brands like Corona and Modelo, Constellation has the power to “encourage” their distributors to support Ballast Point. Kings and Convicts will find themselves in a very different situation. My source offered a stark appraisal of the deal. “Kings and Convicts will be lucky to pare it down to 70,000 and keep it healthy,” he said. “That’s a best-case scenario.”

We’ll see. Watters seems like a sharp guy, and his plan to focus on the West Coast is in alignment with the paring down my industry source thought was critical. And he understood the importance of soothing distributor worries. As our conversation wound down, he added, “I plan on spending a lot of time engaging back with our distributors and making sure they know where we’re headed with this.” It’s a high-stakes gamble, and one the industry will be following and discussing closely.

ALL PHOTOS BALLAST POINT/KINGS AND CONVICTS